The Federal Reserve’s policy of flooding the financial system with cash at every sign of trouble has weakened the U.S. economy more than helped, columnist John Crudele said in the New York Post.
“The U.S. economy is broken. I tried to explain that belief often over the past 10 years,” Crudele said. “I argued that not only was the American economy weak, but it was damaged — broken — by years of too-low interest rates, excessive federal spending and experimental Federal Reserve policies.”
The central bank responded to the 2008 financial crisis by cutting interest rates to record lows near zero percent. It also began a program of "quantitative easing," or buying trillions of dollars of government debt and mortgages to keep cash flowing through the economy.
As the U.S. economy showed signs of stable growth and falling unemployment, the Fed in 2015 began raising interest rates in an effort to “normalize” policy and give itself more room to provide stimulus for the next recession, whenever that may be. The problem is that the Fed Funds rate is still only about 1.25 percent to 1.5 percent, which doesn’t give the central bank much room to cut.
The Fed's actions distorted stock and bond values, making efforts to normalize policy more difficult, Crudele said.
“Because of past policies, the Fed is being forced to jam on the brakes before the economy really gets rolling. And quantitative easing is being undone,” Crudele said. “The Fed really doesn’t have a choice because the financial markets are already hypersensitive to any improvement in the economy.”
Jay Powell on Feb. 5 took over as chairman of the Federal Reserve after being nominated by President Trump and approved by the U.S. Senate. He is taking over the central bank as the Trump administration approves federal spending that may add trillions of dollars to the federal debt over the next 10 years.
The S&P 500 peaked on January 26 before sliding about 2 percent in the following few trading days. Selling picked up on Feb. 2 after a monthly jobs report showed signs of wage inflation, and continued last week with another 10 percent drop into correction territory.
The decline prompted President Trump to comment that good economic news used to be welcomed by investors. Before the correction, he repeatedly boasted that his economic policies including the tax cut were lifting the stock market to record highs.
“President Trump is correct on one thing — it used to be that good news was celebrated by Wall Street,” Crudele said. “It didn’t cause violent reactions in the markets like what began after the Labor Department announced a reasonably good, but not stellar, employment report for January.”
He said the January jobs report showed employment growth that was largely from statistical adjustments meant to compensate for seasonal hiring and firing patterns.
“Had anyone bothered to dive a little deeper into the number, they would have found that January really wasn’t a good month after all. That 200,000 gain came from seasonal adjustments,” Crudele said. “Before the adjustment, the raw data show a monstrous loss of 3 million jobs.”
The wage increases in the jobs report also may have overstated the strength of the labor market, he said.
“The headline figure of 200,000 and the wage growth are what Wall Street paid attention to — and it wasn’t happy,” Crudele said. “Stock and bond markets can’t handle even a little good news without worrying. That’s why I think it is broken. And slapping on the same old kind solutions isn’t going to mend it.”
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